Notice2024-22024
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of Amendment Nos. 4 and 5 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 4, and 5, To Permit the Listing and Trading of Options on the iShares Bitcoin Trust
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 26, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 187 (Thursday, September 26, 2024)</title>
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[Federal Register Volume 89, Number 187 (Thursday, September 26, 2024)]
[Notices]
[Pages 78942-78947]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-22024]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101128; File No. SR-ISE-2024-03]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
of Amendment Nos. 4 and 5 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment Nos. 1, 4, and 5, To
Permit the Listing and Trading of Options on the iShares Bitcoin Trust
September 20, 2024.
I. Introduction
On January 9, 2024, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to list and trade options on exchange-traded product (``ETP'')
shares that represent interests in the iShares Bitcoin Trust
(``IBIT'').\3\ On January 11, 2024, the Exchange filed Amendment No. 1
to the proposed rule change, which replaced and superseded the proposed
rule change as originally filed. On January 25, 2024, the proposed rule
change, as modified by Amendment No. 1, was published for comment in
the Federal Register.\4\ On March 6, 2024, pursuant to Section 19(b)(2)
of the Act,\5\ the Commission designated a longer period within which
to approve the Proposal, disapprove the Proposal, or institute
proceedings to determine whether to disapprove the Proposal.\6\ On
April 24, 2024, the Commission instituted proceedings under Section
19(b)(2)(B) of the Act \7\ to determine whether to approve or
disapprove the Proposal.\8\ On July 19, 2024, the Commission designated
a longer time for Commission action on the Proposal.\9\ The Commission
received comments addressing the proposed rule change.\10\ On May 23,
2024, ISE submitted a letter providing additional information regarding
IBIT and other bitcoin-based ETPs.\11\ On August 21, 2024, ISE
submitted a second letter that provides additional analysis supporting
the proposed position limit of 25,000 contracts for IBIT options.\12\
The Exchange filed Amendment Nos. 2 and 3 to the Proposal on August 29,
2024, and September 12, 2024, respectively. On September 12, 2024, the
Exchange withdrew Amendment Nos. 2 and 3 and filed Amendment No. 4 to
the Proposal.\13\ The Exchange filed Amendment No. 5 to the Proposal on
September 19, 2024.\14\ The Commission is publishing this notice to
solicit comments on Amendment Nos. 4 and 5 from interested persons, and
is approving the proposed rule change, as
[[Page 78943]]
modified by Amendment Nos. 1, 4, and 5, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On January 10, 2024, the Commission approved proposals by
NYSE Arca, Inc., The Nasdaq Stock Market LLC, and Cboe BZX Exchange,
Inc. to list and trade the shares of 11 bitcoin-based commodity-
based trust shares and trust units, including the iShares Bitcoin
Trust, the Grayscale Bitcoin Trust, and the Bitwise Bitcoin ETF. See
Securities Exchange Act Release No. 99306 (Jan. 10, 2024), 89 FR
3008 (Jan. 17, 2024) (order approving File Nos. SR-NYSEARCA-2021-90;
SR-NYSEARCA-2023-44; SR-NYSEARCA-2023-58; SR-NASDAQ-2023-016; SR-
NASDAQ-2023-019; SR-CboeBZX-2023-028; SR-CboeBZX-2023-038; SR-
CboeBZX-2023-040; SR-CboeBZX-2023-042; SR-CboeBZX-2023-044; SR-
CboeBZX-2023-072) (``Bitcoin ETP Order'').
\4\ See Securities Exchange Act Release No. 99396 (Jan. 19,
2024), 89 FR 5047 (Jan. 25, 2024) (``Notice'' or ``Proposal'').
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 99681 (Mar. 6,
2024), 89 FR 17886 (Mar. 12, 2024).
\7\ 15 U.S.C. 78s(b)(2)(B).
\8\ See Securities Exchange Act Release No. 100024 (Apr. 24,
2024), 89 FR 34290 (Apr. 30, 2024) (``Order Instituting
Proceedings'').
\9\ See Securities Exchange Act Release No. 100567 (Jul. 19,
2024), 89 FR 60482 (Jul. 25, 2024).
\10\ Comment letters on the Proposal are available at <a href="https://www.sec.gov/comments/sr-ise-2024-03/srise202403.htm">https://www.sec.gov/comments/sr-ise-2024-03/srise202403.htm</a>.
\11\ See letter from Greg Ferrari, Vice President, U.S. Options,
ISE, dated May 23, 2024 (``ISE Letter I'').
\12\ See letter from Angela Dunn, Nasdaq ISE, LLC, dated Aug.
21, 2024 (``ISE Letter II'').
\13\ Amendment No. 4 amends ISE Options 9, Section 13,
Supplementary Material .01 and ISE Options 9, Section 15,
Supplementary Material .01, respectively, to establish position and
exercise limits of 25,000 contracts for the proposed IBIT options.
\14\ Amendment No. 5 amends the Proposal to describe in greater
detail the surveillance procedures that will apply to the trading of
options on IBIT. The full text of Amendment Nos. 4 and 5 is
available at the Exchange's website at <a href="https://listingcenter.nasdaq.com/rulebook/ISE/rulefilings">https://listingcenter.nasdaq.com/rulebook/ISE/rulefilings</a>.
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II. Description of the Proposed Rule Change, as Modified by Amendment
Nos. 1, 4, and 5
As described in detail in the Notice, the Exchange proposed to
amend its rules to permit the listing and trading of options on
IBIT.\15\ The Exchange stated that options on IBIT would provide
investors with a hedging and risk management tool to manage exposure to
the price of bitcoin and bitcoin-related products and positions.\16\
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\15\ See supra note 4.
\16\ See Notice, 89 FR at 5051.
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Options on IBIT will be physically settled with American-style
exercise.\17\ The Exchange stated that options on IBIT will be subject
to the Exchange's respective initial and continued listing
standards.\18\ The Exchange's initial listing standards require, among
other things, that the security underlying a listed option be
``characterized by a substantial number of outstanding shares that are
widely held and actively traded.'' \19\ The Exchange stated that
options on IBIT will trade in the same manner as other exchange-traded
fund (``ETF'') options, and that options on IBIT will be subject to the
Exchange rules that currently apply to the listing and trading of all
ETF options on the Exchange, including, for example, Exchange rules
governing listing criteria, expiration and exercise prices, minimum
increments, margin requirements, customer accounts, and trading halt
procedures.\20\
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\17\ See id. at 5050.
\18\ See Notice, 89 FR at 5049. See also ISE Options 4, Section
3(a).
\19\ See Notice, 89 FR at 5049.
\20\ See id. at 5050.
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As initially proposed, the position and exercise limits for options
on IBIT would have been determined pursuant to the Exchange's existing
rules.\21\ Under these rules, the position and exercise limits
applicable to an options class depend upon the trading volume and
outstanding shares of the underlying security. Thus, position and
exercise limits of 250,000, 200,000, 75,000, 50,000 or 25,000 contracts
on the same side of the market would have applied to options on IBIT
depending on the six-month trading volume and number of shares
outstanding for IBIT.\22\
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\21\ See id.
\22\ For an option to be eligible for the 50,000-contract limit,
the security underlying the option must have most recent six-month
trading volume of at least 20,000,000 shares, or most recent six-
month trading volume of at least 15,000,000 shares and at least
40,000,000 shares currently outstanding. For an option to be
eligible for the 75,000-contract limit, the underlying security must
have most recent six-month trading volume of at least 40,000,000
shares, or most recent six-month trading volume of at least
30,000,000 shares and at least 120,000,000 shares currently
outstanding. For an option to be eligible for the 200,000-contract
limit, the underlying security must have most recent six-month
trading volume of at least 80,000,000 shares, or most recent six-
month trading volume of at least 60,000,000 shares and at least
240,000,000 shares currently outstanding. For an option to be
eligible for the 250,000-contract limit, the security underlying the
option must have most recent six-month trading volume of at least
100,000,000 shares, or most recent six-month trading volume of at
least 75,000,000 shares and at least 300,000,000 shares currently
outstanding. The 25,000-contract limit applies to options on
underlying securities that do not qualify for a higher contract
limit. See ISE Options 9, Section 13. In addition, ISE Options 9,
Section 13, Supplementary Material .01 establishes higher position
limits for options on certain ETFs.
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In Amendment No. 4, the Exchange proposes to set the position and
exercise limits for options on IBIT at 25,000 contracts regardless of
the trading volume and shares outstanding for IBIT.\23\ According to
the Exchange, ``this position limit is the lowest position limit
available in the options industry, is extremely conservative and more
than appropriate given the IBIT's market capitalization, average daily
volume, and high number of outstanding shares.'' \24\
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\23\ See Amendment 4.
\24\ See id.
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The Exchange represents that the surveillance procedures that it
applies to other ETF options will apply to options on IBIT, and that
its existing surveillance and reporting safeguards are designed to
deter and detect possible manipulative behavior that might arise from
listing and trading options on ETFs.\25\ In Amendment No. 5, the
Exchange more fully describes the surveillance procedures that will
apply to options on IBIT. The Exchange states that it has an adequate
surveillance program in place for options, and that the Exchange
intends to apply the same program procedures to options on IBIT that it
applies to the Exchange's other options products.\26\ The Exchange
states that it market surveillance staff would have access to the
surveillances conducted by The Nasdaq Stock Market LLC (``Nasdaq'')
with respect to IBIT and would review activity in IBIT when conducting
surveillances for market abuse or manipulation in the options on the
IBIT.\27\ Additionally, the Exchange states that it is a member of the
Intermarket Surveillance Group (``ISG'') under the Intermarket
Surveillance Group Agreement, and that ISG members work together to
coordinate surveillance and investigative information sharing in the
stock, options, and futures markets.\28\ The Exchange further states
that it has a Regulatory Services Agreement with the Financial Industry
Regulatory Authority (``FINRA'') and that, pursuant to a multi-party
17d-2 joint plan, all of the options exchanges allocate regulatory
responsibilities to FINRA to conduct certain options-related market
surveillance that are common to rules of all options exchanges.\29\
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\25\ See Notice, 89 FR at 5050.
\26\ The surveillance program includes real-time patterns for
price and volume movements and post-trade surveillance patterns
(e.g., spoofing, marking the close, pinging, phishing). See
Amendment No. 5.
\27\ See id.
\28\ See id.
\29\ Section 19(g)(1) of the Act, among other things, requires
every SRO registered as a national securities exchange or national
securities association to comply with the Act, the rules and
regulations thereunder, and the SRO's own rules, and, absent
reasonable justification or excuse, enforce compliance by its
members and persons associated with its members. See 15 U.S.C.
78q(d)(1) and 17 CFR 240.17d-2. Section 17(d)(1) of the Act allows
the Commission to relieve an SRO of certain responsibilities with
respect to members of the SRO who are also members of another SRO
(``common members''). Specifically, Section 17(d)(1) allows the
Commission to relieve an SRO of its responsibilities to: (i) receive
regulatory reports from such members; (ii) examine such members for
compliance with the Act and the rules and regulations thereunder,
and the rules of the SRO; or (iii) carry out other specified
regulatory responsibilities with respect to such members. See
Amendment No. 5.
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The Exchange states that underlying shares of spot bitcoin ETPs,
including IBIT, are also subject to safeguards related to addressing
market abuse and manipulation.\30\ The Exchange notes that the
Commission stated in it its order approving proposals by several
exchanges to list and trade shares of spot bitcoin-based exchange-
traded products (``Bitcoin ETP Order'') \31\ that:
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\30\ See Amendment No. 5.
\31\ See supra note 3.
Each Exchange has a comprehensive surveillance-sharing agreement
with the CME via their common membership in the Intermarket
Surveillance Group. This facilitates the sharing of information that
is available to the CME through its surveillance of its markets,
including its surveillance of the CME bitcoin futures market.\32\
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\32\ See Amendment No. 5 (citing the Bitcoin ETP Order, 89 FR at
3009).
The Exchange states that, given the consistently high correlation
between the CME bitcoin futures market and the spot bitcoin market, as
confirmed by the Commission through robust correlation analysis, the
Commission was able to conclude that such surveillance sharing
agreements could reasonably be ``expected to assist in surveilling for
fraudulent and manipulative acts and practices in the specific context
of the [Bitcoin ETPs].'' \33\
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\33\ See Amendment No. 5 (citing the Bitcoin ETP Order, 89 FR at
3010-11).
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[[Page 78944]]
In light of surveillance measures related to both options and
futures, as well as the underlying Trust,\34\ the Exchange believes
that existing surveillance procedures are designed to deter and detect
possible manipulative behavior which might potentially arise from
listing and trading the proposed IBIT options.\35\
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\34\ See Securities Exchange Act Release No. 99295 (Jan. 8,
2024), 89 FR 2321, 2334-35 (Jan.12, 2024) (notice of filing of
Amendment No. 1 to SR-Nasdaq-2023-016).
\35\ See Amendment No. 5.
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The Exchange represents that it believes that both it and the
Options Price Reporting Authority, LLC have the necessary systems
capacity to handle the additional traffic associated with the listing
of new series that may result from the introduction of options on
IBIT.\36\
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\36\ See Notice, 89 FR at 5050.
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The Proposal also amends ISE Options 4, Section 3(h) to replace the
reference to the ``ETFS Gold Trust'' with a reference to the Aberdeen
Standard Physical Gold Trust, the current name of the trust. In
addition, the Proposal replaces incorrect cross-references to ``Options
4, Section 3(h)(A)(i)'' in ISE Options 4, Section 4(g) with references
to the correct citation, ``Options 4, Section 3(h)(i).''
III. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange,\37\ and, in particular, the requirements of Section 6 of the
Act.\38\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(5) of the Act,\39\ which
requires that an exchange have rules designed to prevent fraudulent and
manipulative acts and practices, to remove impediments to and perfect
the mechanism of a free and open market, and to protect investors and
the public interest.
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\37\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\38\ 15 U.S.C. 78f.
\39\ 15 U.S.C. 78f(b)(5).
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The Order Instituting Proceedings sought comment on several issues
raised by the Proposal, including whether shares in the underlying
bitcoin ETPs are ``widely held and actively traded,'' as required by
ISE's rules; whether the proposed bitcoin ETP options should be subject
to the same position limits as stock options, and whether the available
supply in the markets for bitcoin should be considered in establishing
position limits for options on the bitcoin ETPs; and the potential
impact on market quality and function that could result from listing
bitcoin ETP options.\40\ Several commenters supported the Proposal,
generally stating that the proposed options would help investors to
hedge their positions and manage crypto-related risk.\41\ Other
commenters raised concerns regarding the potential risks of the
proposed options to individual investors and the financial system.\42\
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\40\ In addition to the Proposal, the Order Instituting
Proceedings sought comment on several other proposals to list and
trade options on bitcoin ETPs. See Order Instituting Proceedings, 89
FR at 34294. See also ISE Letter I.
\41\ See letters from John C. Pickford, Susquehanna, dated Sept.
11, 2024; Steve Crutchfield, Head of Business Development, CTC, LLC,
dated May 17, 2024; Congressman Mike Flood and Congressman Wiley
Nickel, dated May 1, 2024; Joseph Ferrucci, dated Feb. 28, 2024;
Benjamin Pincock, CIO, Method and Theory Capital Management, dated
Feb. 19, 2024; Derek Jerina, dated Feb. 10, 2024; Xplorer Trading,
dated Feb. 7, 2024; and an anonymous commenter, dated Jan. 21, 2024.
\42\ See infra notes 45-49 and accompanying text.
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A. Widely Held and Actively Traded
The Exchange's initial listing standards require, among other
things, that the security underlying a listed option be ``characterized
by a substantial number of outstanding shares that are widely held and
actively traded.'' \43\ The Order Instituting Proceedings requested
comment on whether the Proposal should include data demonstrating that
the shares of the underlying ETP are ``widely held and actively
traded,'' as required by Exchange rules.\44\
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\43\ See ISE Options 4, Section 3(a)(2).
\44\ See Order Instituting Proceedings, 89 FR at 34294. See also
ISE Options 4, Section 3(a).
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One commenter stated that the Commission should wait and evaluate
the market for spot bitcoin ETPs to determine the extent to which they
are widely held and actively traded before approving options on the
spot bitcoin ETPs.\45\ The commenter stated that data indicated that,
compared to when spot bitcoin ETPs were launched, investor demand for
spot bitcoin ETPs had diminished, and that one market participant had
expressed the view that the bitcoin ETP market should ``settle and find
its footing'' before the Commission approves the listing of options on
spot bitcoin ETPs.\46\ In addition, the commenter urged the Commission
to proceed cautiously because ``options on spot bitcoin ETPs will
expose retail investors to a tremendous amount of risk.'' \47\ The
commenter also stated that the approval of options on spot bitcoin ETPs
could pose risks to the broader financial system because the
Commission's approval of spot bitcoin ETPs had deepened the connection
between ``volatile'' cryptocurrencies and the traditional finance
system.\48\ The commenter stated that options on spot bitcoin ETPs
``would further entangle the crypto industry with traditional finance''
and aggravate the risks associated with crypto assets.\49\
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\45\ See letter from Benjamin L. Schiffrin, Director of
Securities Policy, Better Markets, Inc., dated May 21, 2024
(``Better Markets Letter I'') at 2.
\46\ Better Markets Letter I at 2 and n. 17 (quoting Terrence
Yang, managing director of Swan Bitcoin).
\47\ Better Markets Letter I at 1. See also letter from Benjamin
L. Schiffrin, Director of Securities Policy, Better Markets, Inc.,
dated September 13, 2024 (``Better Markets Letter II''). Better
Markets Letter II reiterated the concerns that the commenter raised
in Better Markets I and provided additional information regarding
the volatility of bitcoin. Better Markets Letter II stated, for
example, that in August 2024, bitcoin dropped 15% in a 24-hour
period, a decline that, according to the commenter, affected more
investors because of the Commission's approval of bitcoin-based
ETPs. See Better Markets Letter II at 2. The commenter stated that
the risks to retail investors associated with options trading would
be ``compounded exponentially'' because of the volatility of the
crypto market and, further, that options on spot bitcoin-based
exchange-traded products exacerbate the risks to retail investors of
investing in bitcoin. See Better Markets Letter II at 3.
\48\ See Better Markets Letter I at 4.
\49\ Better Markets Letter I at 5. See also letter from
anonymous commenter dated Apr. 15, 2024 (stating that the
introduction of derivatives tied to the price of bitcoin would
``spell disaster for the financial system and for global markets'').
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The Exchange has addressed comments regarding whether IBIT shares
are widely held and actively traded.\50\ In particular, the Exchange
represented that ``on May 13, 2024, IBIT's total shares outstanding
equaled 482,480,000. On May 13, 2024, IBIT's total shares comprised
approximately 4% of total underlying spot BTC liquidity. IBIT is the
most liquid spot Bitcoin ETF and the 11th most liquid ETF in the U.S.
by average volume (34,825,921 shares) and 18th largest by average
notional ($1,246,060,738). Of note, as of May 22, 2023, IBIT had
approximately 193,956 shareholders.'' \51\
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\50\ See ISE Letters I and II.
\51\ See ISE Letter I at 2. ISE stated that it obtained
information regarding the number of shareholders by contacting
broker-dealers and combining their reported shareholder counts. See
ISE Letter I at notes 3 and 4.
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ISE further represented that ``the market capitalization for IBIT
was 19,789,068 billion [sic], with an average daily volume (`ADV'), for
the preceding three months prior to August 7, 2024, of greater than 26
million shares.'' \52\ In
[[Page 78945]]
addition, ISE represented that on August 12, 2024, IBIT had 611,040,000
shares outstanding.\53\ The Commission has reviewed the Exchange's
analysis and publicly available data regarding IBIT. Based on this
review of information provided by the Exchange and publicly available
information--including information regarding the number of IBIT
shareholders, the number of IBIT shares outstanding, the ADV of IBIT,
and the net assets of IBIT--the Commission concludes that it is
reasonable for the Exchange to determine that IBIT satisfies the
requirement of ISE Options 4, Section 3(a)(2) that an underlying be
widely held and actively traded. As stated above, one commenter
suggested that fund outflows could indicate waning investor demand for
spot bitcoin-based ETPs.\54\ The Commission agrees that investor
interest in IBIT may vary over time.\55\ Nonetheless, the data
discussed above indicate that it is reasonable to conclude that IBIT
shares are widely held and actively traded.\56\
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\52\ ISE Letter II at 3. As of September 6, 2024, IBIT had net
assets of $20,083,776,594. See <a href="https://www.ishares.com/us/products/333011/ishares-bitcoin-trust">https://www.ishares.com/us/products/333011/ishares-bitcoin-trust</a>.
\53\ See ISE Letter II at 5.
\54\ See Better Markets Letter I at 2.
\55\ For example, IBIT had net assets of $20,083,776,594 as of
September 6, 2024, and net assets of $22,672,544,214 as of September
19, 2024. See supra note 52 and <a href="https://www.ishares.com/us/products/333011/ishares-bitcoin-trust">https://www.ishares.com/us/products/333011/ishares-bitcoin-trust</a>.
\56\ See supra notes 51-53 and accompanying text.
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With regard to comments regarding the Proposal's potential risks to
retail investors, including concerns regarding the volatility of
bitcoin,\57\ existing rules governing broker-dealer conduct when
dealing with retail customers would apply to the proposed IBIT options.
For example, the Exchange's rules require its members to ``exercise due
diligence to learn the essential facts as to the Customer and his
investment objectives and financial situation.'' \58\ In fulfilling
this obligation, the member must consider, among other things, a
customer's investment objectives; employment status; estimated annual
income; estimated net worth; and investment experience and
knowledge.\59\ Further, FINRA's heightened suitability requirements for
options trading accounts require that a person recommending an opening
position in any option contract have ``a reasonable basis for
believing, at the time of making the recommendation, that the customer
has such knowledge and experience in financial matters that he may
reasonably be expected to be capable of evaluating the risks of the
recommended transaction, and is financially able to bear the risks of
the recommended position in the option contract.'' \60\
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\57\ See Better Markets Letter II at 2-3.
\58\ See ISE Options 10, Section 6(b).
\59\ See ISE Options 10, Section 6(b)(1).
\60\ See FINRA Rule 2360(b)(19).
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The Commission acknowledges the comments regarding the potential
impact of bitcoin ETP options on the traditional financial system.
Pursuant to Section 19(b)(2) of the Exchange Act, however, the
Commission must approve a proposed rule change filed by a national
securities exchange if it finds that the proposed rule change is
consistent with the applicable requirements of the Exchange Act.\61\
For the reasons discussed herein, the Commission finds that the
proposed rule change satisfies the requirements of the Exchange Act,
including the requirements in Section 6(b)(5) that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to remove impediments to and perfect
the mechanism of a free and open market, and to protect investors and
the public interest.
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\61\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C.
78s(b)(2)(C).
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B. Position and Exercise Limits
The Order Instituting Proceedings also requested comment on whether
the Proposal demonstrated that options on the bitcoin ETPs should be
subject to the same position limits as options on stock, and whether
the available supply in the markets for bitcoin should be considered in
establishing position limits for options on the bitcoin ETPs.\62\
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\62\ See Order Instituting Proceedings, 89 FR at 34294.
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Position and exercise limits serve as a regulatory tool designed to
deter manipulative schemes and adverse market impact surrounding the
use of options. Since the inception of standardized options trading,
the options exchanges have had rules limiting the aggregate number of
options contracts that a member or customer may hold or exercise.
Options position and exercise limits are intended to prevent the
establishment of options positions that can be used or might create
incentives to manipulate or disrupt the underlying market to benefit
the options position.\63\ In addition, such limits serve to reduce the
possibility of disruption in the options market itself, especially in
illiquid classes.\64\ As the Commission has previously recognized,
markets with active and deep trading interest, as well as with broad
public ownership, are more difficult to manipulate or disrupt than less
active and deep markets with smaller public floats.\65\ The Commission
also has recognized that position and exercise limits must be
sufficient to prevent investors from disrupting the market for the
underlying security by acquiring and exercising a number of options
contracts disproportionate to the deliverable supply and average
trading volume of the underlying security.\66\ At the same time, the
Commission has recognized that limits must not be established at levels
that are so low as to discourage participation in the options market by
institutions and other investors with substantial hedging needs or to
prevent specialists and market-makers from adequately meeting their
obligations to maintain a fair and orderly market.\67\
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\63\ See Securities Exchange Act Release No. 39489 (Dec. 24,
1997), 63 FR 276, 279 (Jan 5. 1998) (order approving File No. SR-
Cboe-97-11).
\64\ Id.
\65\ Id.
\66\ See, e.g., Securities Exchange Act Release Nos. 21907 (Mar.
29, 1985), 50 FR 13440, 13441 (Apr. 4, 1985) (order approving File
Nos. SR-CBOE-84-21, SR-Amex-84-30, SR-Phlx-84-25, and SR-PSE-85-1);
and 40875 (Dec. 31, 1998), 64 FR 1842, 1843 (Jan. 12, 1999) (order
approving File Nos. SR-CBOE-98-25; Amex-98-22; PCX-98-33; and Phlx-
98-36).
\67\ See id.
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The Exchange initially proposed to subject options on IBIT to the
same position and exercise limit levels as other ETF options currently
trading.\68\ In Amendment No. 4, however, the Exchange proposed to
provide position and exercise limits of 25,000 contracts for options on
IBIT,\69\ which are the lowest position and exercise limits to which
other ETF options are subject. In proposing these position and exercise
limits, the Exchange considered IBIT's market capitalization and ADV,
and its prospective position and exercise limits in relation to other
securities.\70\ The Exchange stated that this analysis shows that
options symbols with similar market capitalization and ADV to IBIT have
a position and exercise limits in
[[Page 78946]]
excess of 400,000 options. Thus, according to the Exchange, this
demonstrates that ``the proposed 25,000 same side position limit for
options on IBIT is extremely conservative relative to these options
symbols which are a full standard deviation above the mean in
comparison.'' \71\
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\68\ See Notice, 89 FR at 5050.
\69\ In Amendment No.4, the Exchange also clarified that its
analysis in ISE Letter II applies to exercise limits as well as
position limits.
\70\ The Exchange represented that it aggregated market
capitalization and volume data for securities that have defined
position limits utilizing data from The Options Clearing
Corporation. This pool of data took into consideration 3,984 options
on single stock securities, excluding broad based ETFs. ISE
aggregated the data based on market capitalization and ADV and
grouped option symbols by position limit utilizing statistical
thresholds for ADV and market capitalization that were one standard
deviation above the mean for each position limit category (i.e.,
25,000, 50,000 to 65,000, 75,000, 100,000 to less than 250,000,
250,000 to 400,000, 450,000 to 1,000,000, and greater than or equal
to 1,000,000). See ISE Letter II at 3-4. ISE Options 9, Section
13(d) establishes position limits for various options. For example,
a 25,000-contract limit applies to options having an underlying
security that does not meet the trading volume and outstanding
shares requirements for a higher position limit. See supra note 22.
\71\ See ISE Letter II at 4.
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The Exchange also stated that it reviewed IBIT's data relative to
the market capitalization of the entire bitcoin market in terms of
exercise risk and availability of deliverables.\72\ Utilizing data as
of August 3, 2024, there were 19,737,193 bitcoins in circulation.\73\
Using a price of $57,000 per bitcoin, the market capitalization of
bitcoin would be greater than $1.125 trillion.\74\ According to the
Exchange, if a position limit of 400,000 options were considered, ``the
exercisable risk would represent only 6.6% of the outstanding shares of
IBIT.'' \75\ The Exchange also stated that, with the proposed 25,000
position limit, the exercisable risk ``only represents 0.4% of the
outstanding shares of IBIT.'' \76\ Further, according to the Exchange,
because IBIT has a creation and redemption process managed through the
issuer, the exercisable risk for options on IBIT would be less than
0.01% of the market capitalization of all outstanding bitcoin.\77\ The
Exchange stated that, assuming a scenario where all options on IBIT
shares were exercised given the proposed 25,000 per same side position
limit, this would have a virtually unnoticed impact on the entire
bitcoin market.\78\ The Exchange also stated that ``[t]his analysis
demonstrates that the proposed 25,000 per same side position limit is
also ``extremely conservative and more than appropriate for options on
IBIT.'' \79\
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\72\ See id.
\73\ See id.
\74\ Id.
\75\ Id.
\76\ See id.
\77\ See id.
\78\ See id.
\79\ Id.
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In addition, the Exchange compared the proposed position limit to
position limits for derivative products regulated by the Commodity
Futures Trading Commission (``CFTC''). Specifically, the Exchange
examined the equivalent bitcoin futures position limits, and,
specifically, the CME bitcoin futures contract, which has a position
limit of 2,000 futures.\80\ Based on this analysis, the Exchange
believes that a position limit of 176,338 contracts for IBIT options
would be equivalent to the 2,000-contract notional position limit for
CME bitcoin futures.\81\ Stated another way, the Commission estimates
that the proposed position limit of 25,000 contracts for IBIT options
is roughly equivalent to a position limit of 280 bitcoin futures
contracts. In analyzing the proposed position and exercise limits, ISE
also considered the supply of IBIT and the number of market
participants that would be required to exercise their positions in
unison to place the underlying asset under stress.\82\ ISE concluded
that with a position limit of 25,000 contracts on the same side of the
market and 611,040,000 shares of IBIT outstanding, 244 market
participants would have to simultaneously exercise their positions to
place IBIT under stress.\83\ ISE further stated that, historically,
from observation, it appears that no more than five market participants
holding positions in a security have exercised their options at the
same time.\84\
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\80\ See id.
\81\ The Exchange multiplied the 2,000-contract limit by a
multiplier of five, resulting in $550 million of notional value for
bitcoin futures. See ISE Letter II for a detailed description of the
Exchange's methodology.
\82\ See id. at 5.
\83\ See id.
\84\ See id.
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Option position limits are determined based on six-month trading
volume in the underlying security or six-month trading volume and
number of shares outstanding of the underlying security.\85\ The
Exchange stated that position limits must balance concerns regarding
mitigating potential manipulation and the cost of inhibiting potential
hedging activity that could be used for legitimate economic purposes,
and to achieve such balance, options on IBIT would be subject to the
25,000-option contract limit.\86\ The Commission finds that the
proposed position and exercise limits are consistent with the Act, and
in particular, with the requirements in Section 6(b)(5) that the rules
of a national securities exchange designed to prevent fraudulent and
manipulative acts and practices and to protect investors and the public
interest. As discussed above, the Commission has recognized that
position and exercise limits must be sufficient to prevent investors
from disrupting the market for the underlying security by acquiring and
exercising a number of options contracts disproportionate to the
deliverable supply and average trading volume of the underlying
security.\87\ In addition, the Commission has stated previously that
rules regarding position and exercise limits are intended to prevent
the establishment of options positions that can be used or might create
incentives to manipulate or disrupt the underlying market so as to
benefit the options position.\88\ Based on its review of the data and
analysis provided by the Exchange, the Commission concludes that the
proposed position and exercise limits satisfy these objectives.
Specifically, the Commission has considered and reviewed the Exchange's
analysis that the exercisable risk associated with a position limit of
25,000 contracts represented only 0.4% of the outstanding shares of
IBIT.\89\ The Commission also has considered and reviewed the
Exchange's statement that with a position limit of 25,000 contracts on
the same side of the market and 611,040,00 shares of IBIT outstanding,
244 market participants would have to simultaneously exercise their
positions to place IBIT under stress.\90\ Based on the Commission's
review of this information and analysis, the Commission concludes that
the proposed position and exercise limits are designed to prevent
investors from disrupting the market for the underlying security by
acquiring and exercising a number of options contracts disproportionate
to the deliverable supply and average trading volume of the underlying
security, and to prevent the establishment of options positions that
can be used or might create incentives to manipulate or disrupt the
underlying market so as to benefit the options position.
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\85\ See supra note 19 and accompanying text.
\86\ See ISE Letter II at 3.
\87\ See supra note 66 and accompanying text.
\88\ See Securities Exchange Act Release No. 57352 (Feb.19,
2008), 73 FR 10076, 10080 (Feb. 25, 2008) (order approving File No.
SR-Cboe-2008-07).
\89\ See ISE Letter II at 4.
\90\ See id. at 5.
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C. Surveillance
Lastly, in the Order Instituting Proceedings, the Commission asked
whether the Proposal should include information regarding how the
Exchange would obtain information concerning trading in the bitcoin
ETPs from the exchanges where the bitcoin ETPs trade. In its letter to
the Commission, the Exchange represented that it ``would implement any
new surveillance procedures it deemed necessary to effectively monitor
the trading of options on Bitcoin ETPs.'' \91\ In Amendment No. 5 to
the Proposal, ISE provided additional detail regarding the surveillance
procedures that will apply to IBIT options. As described more fully
above, the Exchange will apply its existing options surveillance
[[Page 78947]]
procedures to IBIT options.\92\ The Exchange states that it market
surveillance staff will have access to the surveillances conducted by
Nasdaq with respect to IBIT and will review activity in IBIT when
conducting surveillances for market abuse or manipulation in options on
IBIT.\93\ Additionally, the Exchange states that it is a member of ISG,
whose members work together to coordinate surveillance and
investigative information sharing in the stock, options, and futures
markets.\94\ CME also is a member of ISG. In approving the Bitcoin
ETPs, the Commission concluded that:
---------------------------------------------------------------------------
\91\ ISE Letter I at 7.
\92\ The Exchange states that its surveillance program includes
real-time patterns for price and volume movements and post-trade
surveillance patterns (e.g., spoofing, marking the close, pinging,
phishing). See Amendment No. 5.
\93\ See id.
\94\ See id.
fraud or manipulation that impacts prices in spot bitcoin markets
would likely similarly impact CME bitcoin futures prices. And
because the CME's surveillance can assist in detecting those impacts
on CME bitcoin futures prices, the Exchanges' comprehensive
surveillance-sharing agreement with the CME--a U.S. regulated market
whose bitcoin futures market is highly correlated to spot bitcoin--
can reasonably be expected to assist in surveilling for fraudulent
and manipulative acts and practices in the specific context of [the
Bitcoin ETPs].\95\
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\95\ See Bitcoin ETP Order, 89 FR at 3010-11.
Together, these surveillance procedures should allow the Exchange
to investigate suspected manipulations or other trading abuses in IBIT
options.
D. Additional Changes
The proposed changes to update the name of the ETFS Gold Trust to
the Aberdeen Standard Physical Gold Trust and to correct the cross-
references in ISE Options 4, Section 4(g) will protect investors and
the public interest by helping to ensure that the Exchange's rules
remain accurate and up-to-date.
IV. Solicitation of Comments on Amendment Nos. 4 and 5 to the Proposed
Rule Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment Nos. 4 and 5 are consistent with
the Act. Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#0b797e676e26686466666e657f784b786e68256c647d"><span class="__cf_email__" data-cfemail="3d4f485158105e5250505853494e7d4e585e135a524b">[email protected]</span></a>. Please include
file number SR-ISE-2024-03 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-ISE-2024-03. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-ISE-2024-03 and should be
submitted on or before October 17, 2024.
V. Accelerated Approval of Amendment Nos. 4 and 5
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act, for approving Amendment Nos. 4 and 5 prior to the 30th day
after the date of publication of notice of Amendment No. 3 in the
Federal Register. Amendment No. 4 amends the Proposal to establish
position and exercise limits of 25,000 contract for the proposed IBIT
options, instead of the same position and exercise limits as other
options currently trading. The Exchange stated that some commodity-
based ETPs currently have position and exercise limits of 250,000
contracts.\96\ As described above, ISE provided data and analysis
supporting the proposed position and exercise limits and stated, among
other things, that the proposed position and exercise limits would
represent 0.4% of the outstanding shares of IBIT.\97\ The Commission
concludes that proposed position and exercise limits are designed to
minimize the potential for manipulations or disruptions of the
underlying market.\98\ Amendment No. 5 describes in greater detail the
surveillance procedures that will apply to IBIT options. The additional
information regarding these procedures assists the Commission in
evaluating the Proposal and determining that the Proposal is consistent
with the Act and the rules and regulations thereunder applicable to a
national securities exchange, as discussed above. Accordingly, the
Commission finds good cause, pursuant to Section 19(b)(2) of the
Act,\99\ to approve the proposed rule change, as modified by Amendment
Nos. 4 and 5, on an accelerated basis.
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\96\ See ISE Letter II at 6 (stating that the SPDR Gold Shares
ETF and the iShares Silver Trust ETF have position limits of 250,000
contracts).
\97\ See ISE Letter II at 4.
\98\ The Commission recognizes that position limits should not
be established at levels that are so low as to discourage
participation in the options market by institutions and other
investors with substantial hedging needs or to prevent specialists
and market makers from adequately meeting their obligations to
maintain a fair and orderly market. See, e.g., Securities Exchange
Act Release Nos. 21907 (Mar. 29, 1985), 50 FR 13440 (Apr. 4, 1985)
(order approving File Nos. SR-CBOE-84-21, SR-Amex-84-30, SR-Phlx-84-
25, and SR-PSE-85-1); 40875 (Dec. 31, 1998), 64 FR 1842, 1843 (Jan.
12, 1999) (order approving File Nos. SR-CBOE-98-25; Amex-98-22; PCX-
98-33; and Phlx-98-36). The Commission finds that the proposed
position and exercise limits are consistent with these objectives.
\99\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
For the reasons set forth above, the Commission finds that the
proposed rule change, as modified by Amendment Nos. 1, 4, and 5, is
consistent with the requirements of the Exchange Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, the requirements of Section 6(b)(5) of the
Act.\100\
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\100\ 15 U.S.C. 78f(b)(5).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\101\ that the proposed rule change (SR-ISE-2024-03), as modified
by Amendment Nos. 1, 4, and 5, be, and is hereby, approved.
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\101\ 15 U.S.C. 78s(b)(2).
\102\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\102\
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-22024 Filed 9-25-24; 8:45 am]
BILLING CODE 8011-01-P
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